Good day, everyone, and welcome to the Credit Acceptance Corporation Second Quarter 2025 Earnings Call. Today's call is being recorded. A webcast and transcript of today's earnings call will be made available on Credit Acceptance's website. At this time, I would like to turn the call over to Credit Acceptance's Chief Financial Officer, Jay Martin. Please go ahead.

Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation Second Quarter 2025 Earnings Call. As you read our news release posted on the Investor Relations section of our website and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of federal securities law. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in the cautionary statement regarding forward-looking information included in the news release. Consider all forward-looking statements in light of those and other risks and uncertainties. Additionally, I should mention that to comply with the SEC's Regulation G, please refer to the financial results section of our news release, which provides tables showing how non-GAAP measures reconcile to GAAP measures. At this time, I will turn the call over to our Chief Executive Officer, Ken Booth, to discuss our second quarter results.

Thanks, Jay. Our results for this quarter reflect steady execution with declines in loan performance and year-over-year origination volumes balanced by continued portfolio growth. Loan performance declined this quarter with our 2022, 2023, and 2024 vintages underperforming our expectations and our 2025 vintage exceeding our expectations, while our other vintages were stable during the quarter. Overall, forecasted net cash flows declined by 0.5% or $56 million. During the quarter, we experienced a decline in unit and dollar volumes, though our loan portfolio still reached a new record-high of $9.1 billion on an adjusted basis, up 6% from last Q2. Our market share in our core segment of used vehicles financed by subprime consumers was 5.4% for the first 5 months of the year, down from 6.6% for the same period in 2024. Our unit volume was impacted by our Q3 2024 scorecard change that resulted in lower advance rates and likely impacted by increased competition. Beyond these 2 key drivers, we continued making progress during the quarter towards our mission of maximizing intrinsic value and positively changing the lives of our 5 key constituents: dealers, consumers, team members, investors, and the communities we operate in. We do this by providing a valuable product that enables dealers to sell vehicles to consumers regardless of their credit history. This allows dealers to make incremental sales to the 55% of adults with credit profiles below prime. For these adults, it enables them to obtain a vehicle to get to their jobs, take their kids to school, etc. It also gives them the opportunity to improve or build their credit. Our customers are people like Sugar from Oklahoma. Sugar's life took a dramatic turn when the former credit counselor was arrested for driving under the influence in 2014. Overwhelmed with the shame of having lost her license, she realized she needed to make a profound change. She sought help from Women's Firstep, a treatment facility. After graduating from the program 8 months later, she began rebuilding her life. She regained her license, started a stable career, and achieved a powerful symbol of victory when she was approved by us for a car loan. This journey of recovery came full circle when Sugar was hired to work for the treatment facility that had helped her, dedicating herself to her new mission of helping others find their own second chance. During the quarter, we financed over 85,000 contracts for our dealers and consumers. We collected $1.4 billion overall and paid $63 million in dealer holdback and accelerated dealer holdback to our dealers. We enrolled 1,560 new dealers and had 10,655 active dealers during the quarter. We continue to invest in our engineering team, focused on modernizing both our key technology architecture and how our teams perform work. The engineering team has made significant strides in modernizing our loan origination system. This modernization has laid a strong foundation for us to deploy innovative, frictionless dealer experiences, has increased the velocity at which we release features from a matter of months to a matter of days, allowing us to accelerate value to our business and customers. During the quarter, we received 2 awards for our amazing workplace, including being named one of the 100 Best Companies to Work For by Great Place To Work and Fortune magazine, with 93% of team members agreeing that Credit Acceptance is a great place to work. This year marked our 11th time in the last 12 years receiving this prestigious award, moving up 5 spots to the #34 ranking. We support our team members in making a difference to what makes a difference to them, raising over $270,000 for St. Jude's Research Hospital and the Make-A-Wish Foundation. Through these donations, we were able to fund wishes for 15 children, bringing our total to 95 wishes granted. Now Jay Martin and I will take your questions along with Doug Busk, our Chief Treasury Officer, and Jay Brinkley, our Senior Vice President and Treasurer.

The first question will come from Moshe Orenbuch of TD Cowen.

Great. I noticed that, obviously, the collections were down again this quarter, but the adjusted yield higher. I mean that's happened, I think, at least once before. But maybe if you could just talk about what drives that. Usually, the adjusted yield will kind of follow that, the lower collections.

Sure. So the decline in forecasted collections, the change in the amount and timing there, all things being equal, would drive the adjusted yield down. But the ultimate yield that we recognize is also dependent on the volume and pricing of new loan originations. So that's what you've seen in the last few quarters. The yields of the new loans that we've originated more than offset the decline in the yield due to loan performance.

Right. Interestingly, the collection shortfall is greater than in the last two quarters. While you mentioned that the '25 vintage is performing well, the underperformance in the back book has been more significant than in the past. Even excluding the changes you've made, it remains larger than in either of the last two quarters. In our previous discussions, there was a notion that you were depleting those vintages and they should be causing less harm, but that's not what we are seeing. Can you provide any insight into why that is?

Yes. I would say that our forecasted models generally perform well during a relatively stable economic period, but are less accurate during periods of volatility like we've experienced in recent years. We do think the continued impact of inflation is contributing to the loan underperformance we've seen there. You may recall, second quarter last year, we put in an adjustment to address that underperformance. It's worked fairly well for most vintages, but for our 2024 loans, we have seen some more underperformance there than what that adjustment would have anticipated. And it's specifically related to the loans that we originated in '24 before our scorecard change during the third quarter. So that's the bulk of the decrease you saw for the quarter was on that segment of loans. The good news for the loans that we've originated since we put that scorecard change in during the third quarter last year, those loans are performing as expected. We haven't seen any signs of underperformance on those loans.

Right. And then just a couple of other trends that caught my attention. The first is that the loan size continues to decline over the last couple of quarters. Is there a different type of card that you're financing? Or is there something else going on there? And then a follow-up to that.

Yes, we have observed a different mix of consumers in recent years, which is impacting the size of the consumer loans. It's simply a different mix of business.

Different meaning higher quality, lower quality? Because back in '23, I guess, you were talking about a higher quality kind of borrower. Is this a lower-quality borrower that you're seeing?

I don't think it's a lower-quality borrower. I think there's a slightly different mix of vehicles that are being financed. Again, there's been a fair amount of variability in the mix of vehicles since the start of the pandemic. So I think it's just normal volatility there.

Right. The last thing I want to mention is that you’re projecting a collection percentage exceeding 65% for 2025, which is actually higher for the second quarter. It has been increasing even though you've been reducing your estimates for nine consecutive quarters. It's difficult for me to understand this situation from my perspective since I don't have the detailed information.

Yes. The initial forecasted collection rate is similar to what you've mentioned. However, the different mix of business is influencing this. Over the past few years, we have adjusted our initial expectations downward. Therefore, if the loans originated in 2024 and 2025 had been issued back in 2022, they would have had a higher expected collection rate. We are continuously updating our expectations for new loans to account for any underperformance, and this is included in our initial estimates.

And the next question will be coming from the line of John Rowan of Janney Montgomery.

I would like to gain a clearer understanding of the return profile. Your release mentions an 8.5% adjusted return on capital, while the cost of capital stands at 7.4%, resulting in a spread of about 110 basis points. Looking back at some of the vintages you've written down, are any of them actually yielding a negative economic return? What is the threshold for that? I'm trying to determine if there will come a time when you will adopt a more realistic approach and start placing loans at achievable rates. Are you actually generating economic profit on the loans being issued today, especially with the anticipated decrease in forecasted collections? I understand this is a complex question, but you've invested significantly in share repurchases this quarter. I want to evaluate if you're reallocating capital to repurchase shares, given that older vintages might be producing negative economic profit if trends continue in 2024 and 2025.

Yes. So our business model is designed to produce an acceptable return even if our loans underperform. To your point, if you look at the '22 vintage, that vintage has underperformed the most of any year that we presented in that collection rate table. I'll say those loans in aggregate are still producing a return on capital in excess of our cost of capital, assuming that those collection expectations are accurate. So there would be, at some point, if they continue to decline, where that return would fall below our weighted average cost of capital. But based on our current estimates, those are still producing economic profit. They're still profitable loans.

Okay. And can you tell me how much money you spent on repurchases in the quarter and what the plans are for repurchases going forward? Because it seems like you spent quite a bit of money in the second quarter.

Yes. This is Jay Brinkley. We were very active in the quarter. We bought back 530,000 shares at roughly an average price of $490. As always, we look at ensuring that we've got adequate capital to fund new originations and then look at the share price as well. We haven't changed our view there. Volume is down, as Ken mentioned, due to our pricing change and to some degree, the competitive environment. So year-over-year growth being slower. If you look back over a long period when originations are down, we tend to be pretty active, and that was certainly the case this quarter.

And what's remaining on any current authorization? And where are the plans going forward? That's it for me.

We currently have 391,000 shares remaining under the latest authorization. Based on that, we will evaluate the situation and return to the Board for additional capacity if a buying opportunity arises.

The next question will be coming from the line of Kyle Joseph with Stephens.

I wanted to discuss the competitive landscape. In your prepared remarks, you noted that competition has either intensified or remains strong. Considering the macroeconomic outlook and the expectation that tariffs will continue to drive up used car prices, along with the industry recovering from the 2022 market, do you anticipate seeing a slight decrease in activity from traditional credit providers? Or have you actually observed them becoming more aggressive after Liberation Day? I would like to understand your perspective on the current state of competition.

The competitive environment is always hard to forecast how it's going to be going forward. Obviously, like our volume per dealer went down, so it does seem like the environment is more competitive in the first half of this year. Tariffs and things that drive up costs for our consumers tend to be a negative for us, both whether it's related to the vehicles or just other things that they spend money on. But it's really too early to tell what the impact will be on our business. I do think from a volume standpoint, we had a pretty tough comparable. Last year was our highest volume year ever, so when we compare it year-over-year, it's a tough comparable. We made our scorecard change last year in the middle of the third quarter. Once we kind of get past that, we'll have an easier comparable. So I think that those will be some things that might get positive going forward.

No, that's good color. A good reminder on the tough comps.

With no further questions in the queue, I would like to turn the conference back over to Mr. Martin for any additional or closing remarks. Go ahead, please.

We'd like to thank everyone for their support and for joining us on the conference call today. If you have any additional follow-up questions, please direct them to our Investor Relations mailbox. We look forward to talking to you again next quarter. Thank you.

Once again, this does conclude today's conference. We thank you for your participation. You may disconnect.